Euro-Dollar Week Ahead Forecast: "Sell EUR/USD in to Year-end" - Nordea

- EUR/USD opens near midpoint of defining 1.16-to-1.20 range.
- But faces stiff resistance near 1.19, is capped by 1.20 for now.
- As prolonged virus restrictions risk upset, ECB speeches loom. 

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• EUR/USD spot rate at time of writing: 1.1832
• Bank transfer rate (indicative guide): 1.1419-1.1502
• FX specialist providers (indicative guide): 1.1656-1.1727
• More information on FX specialist rates here

The Euro-to-Dollar exchange rate firmed at the start of the new week and edged towards the top of its recent multi-day range, but Europe's single currency could be vulnerable to upset in the week ahead given the tightening of coronavirus-related restrictions that come as stock markets look richly priced and ahead of a series of speeches from European Central Bank (ECB) President Christine Lagarde.

"EUR/USD is starting the new week by following the same upward trend shown in the second half of last week, now testing the upper half of the 1.18 region. USD may stay the main driver of the pair for most of this week, or at least until we see material developments on a Brexit trade deal as other idiosyncratic drivers for the EUR may remain scarce, with only consumer confidence on Friday standing out in the Eurozone calendar," says Francesco Pesole, FX Strategist at ING Bank N.V.

The Euro edged lower last week even in the face of another strong performance from U.S. and European stock markets, an unusual divergence in performance that came after Pfizer said its coronavirus vaccine candidate had proven highly effective in clinical trials.

The prospect of a successful vaccine rollout could support the Euro and other risk currencies over the coming months, although in the very short-term at least the danger is that severe and prolonged containment measures do more damage to the recovery than investors expect. 

This risk was underlined at the weekend when Germany warned that enhanced restrictions could last for the duration of winter, echoing similar statements from France and the UK, while Austria announced that it will go into an even stricter form of lockdown on Tuesday that will also see schools close again.

"Next week should be another quiet one for the EUR from a domestic standpoint with no major data releases on tap while the possible slowdown of COVID-19 case counts may act as a tailwind. On the flip side, the likely announcement of an extension of current virus restrictions in some key countries may curb the EUR; Italy today announced its regional lockdowns will last past their Dec 3 original end," says Shaun Osborne, chief FX strategist at Scotiabank. 

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 index futures (black line, left axis).  Automatically book your ideal EUR/USD exchange rate when it is reached, learn how. 

The Euro enters the new week trading around the midpoint of its current 1.16-to-1.20 range but faces stiff resistance from earlier highs that now act as technical impediments to further gains, and the perceived pain threshold of the European Central Bank that is also located around 1.20. 

"EUR/USD has tested and so far remains capped by its current November high at 1.1920 and the 78.6% retracement at 1.1926. The 55 day ma has been eroded but dips lower have been tepid and should ideally be contained by the 1.1689 mid-October low," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's a buyer of the Euro and is targeting a move up to 1.2010. "Resistance at 1.1926 is considered the last defence for the August peak at 1.2014." 

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ECB chief economists Philip Lane protested in September when the Euro-to-Dollar rate traded above 1.20 for the first time in just more than two-years, fostering a perception in the market that it does not want to see the Euro up there. 

A strengthening European currency risks reducing already inadequate inflation pressures over the coming years and stifling Eurozone export competitiveness, although President Christine Lagarde will have no less than three opportunities to reinforce the bank's message this week.

"If EM FX continues to party (to celebrate the Big Guy), the market will eventually figure out that 1.20 in EUR/USD is not an ever-lasting line in the sand for the ECB," says Martin Enlund, chief FX strategist at Nordea Markets. "The pandemic ain’t over by a long-shot and a big QE expansion will come in December. We therefore suspect 1.20 will remain the cap for the pair in the near term and we favour strategies that sell EUR/USD in to year-end."

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (black line, left axis).  

Lagarde appears before the World Economic Forum's Pioneers of Change Summit at 13:00 on Monday, followed by the Women's Forum at 15:00 Friday and the European Banking Congress at 08:15 Friday. Investors will listen closely for clues on the likely size of December's anticipated stimulus package as well as for comments on the Euro. 

"After every previous regional recession, the Euro area’s growth rates have not returned to pre-recession trends. This was initially flagged by our colleague Chris Hare in his report Fear and distancing in Europe (18 September 2020). Our concern for the EUR is that once again we see a similar story emerge in the recovery from this pandemic," says Dominic Bunning, head of European FX research at HSBC, who forecasts a year-end EUR/USD rate of 1.17. "We continue to favour the USD over the EUR, GBP and JPY, given its stronger growth outlook over both the short and long term, coupled with higher rates and slower central bank balance sheet expansions."  

ECB rhetoric and policy will be an important driver of the price action over the coming days but so too will the response of stock market investors to indications that European coronavirus restrictions could last for longer than had been anticipated by markets. All of Europe's major economies were mired in a new shutdown of some severity at the weekend, while the global rollout of a coronavirus vaccine remains months if-not years away. 

"Recent positive vaccine news added fuel to the fire but current negative COVID-19 developments cap the topside for now. EUR/USD has moved towards 1.19 on the back of the US election but grinded marginally lower again despite positive vaccine developments," says Christin Tuxen, head of FX research at Danske Bank. "We still see EUR/USD around 1.20 in 3M but longer term the USD is ‘the winner’ and we forecast 1.16 in 12M." 

If vaccine hopes are unable to offset concerns about the cost of economic closures through winter for investors then the Euro could find itself under pressure again in the week ahead, a period which offers little meaningful economic data, leaving the ECB's Lagarde and coronavirus impact on stock markets in the driving seat.

Above: Euro-to-Dollar rate shown at weekly intervals alongside Dollar Index (black line, left axis).